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TMI Blog2013 (9) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... ght forward loss of Rs. 42,65,821. On examination of records the CIT found that there were errors in the assessment order on the following reasons: (a) The Assessing Officer allowed additional depreciation on plant and machinery at Rs. 71,95,250. According to the CIT, the assessee is in the business of land development and resort. It is not engaged in the business of manufacture or production of an article or thing. Being so, the assessee is not entitled for the additional depreciation u/s. 32(1)(iia) of the Act. On pointing out this to the assessee by the CIT(A), the assessee conceded that it has no objection for disallowance of additional depreciation. (b) The assessee claimed deduction u/s. 80IB(7B) of the Act on the profits and gains of convention centre as the assessee was not maintaining separate books of account for the convention centre, the CIT directed the Assessing Officer to withdraw deduction u/s. 80IB(7B) at Rs. 1,51,71,548. (c) Further the assessee obtained loan Corporation Bank, SBI, Union Bank of India and Andhra Bank for its housing project by mortgaging lands used for development. The assessee valued the landed property f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The Hon'ble Calcutta High Court, in the case of CIT vs. S.P. Jaiswal Estates (P) Ltd, [1999] 196 ITR 179 [Cal] held that the preparation of food to be a manufacturing activity. T he Hon'ble Gauhati High Court, chose to follow the more liberal view of the Calcutta High Court. In its view, food prepared in a hotel is essentially a different item than the raw material used and preparation of food is an integral part of hotel business. In the case of CIT vs. Sri Annapurna Gowrishankar Hotels P. Ltd [2003] 262 ITR 497, the question was whether the preparation of own food products and selling them in its own hotel would make it a manufacturing activity. The Hon'ble Court held it to be manufacturing activity. In the case of CIT vs. Sri Sidral Food P. Ltd [2006] 282 ITR 563, the Hon'ble Gujarat High Court considered that the aspect of preparation of bakery products like bread, biscuits etc, would constitute manufacturing activity of the assessee. The Court held it to be a manufacturing activity following the decision of Hon'ble Supreme Court, in the case of Dy.CIT Vs. Pio Food Packers [1980] 46 STC 63 [SC]. Considering the rationale of the above judicial pronouncements it cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B) of the IT Act. However, the learned Commissioner in his order u/s 263, without alleging that the conditions laid in the section 80IB(7B) / Rule 18DC have not been satisfied, assumed that the assessee has not maintained separate books of accounts in respect of income of convention centre, whereas such condition of maintaining of separate books of accounts for convention centre does not appears to exist either in the respective Section or in the Rule, as seen from the Section and Rule. During the course of 263 proceedings the Ld. Commissioner directed the AR. of the assessee to produce the books of accounts and vouchers for verification. It is pertinent to mention here that the assessee has produced books of accounts and other relevant documents during the course of assessment and the Ld. AO. after verifying the same completed the assessment by accepting the claim of deduction u/s 80IB[7B]. The Ld. Commissioner without any basis assumed that the assessee has not produced books of accounts and vouchers during the course of asst. proceedings and also assumed that separate books for convention centre and other business are not maintained. The action of the Ld. Commissioner calling fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illage for its resort facilities project and SOD of Rs. 1.00 cr and Rs. 1.50 cr for it's Housing division project by mortgaging the land of 42.90 acres situated in Sy No. 420/1/2/3 & 706. The land was purchased by the company way back in the year 2001. Out of the total land purchased part of the land was being used for Housing development project and included in Inventory as Work in Progress and part is used for the hotel and resort and convention centre. Land shown in the balance sheet whose cost mentioned at Rs. 18,38,345/- are belonging to only convention centre. The rest of the land belongs to development business. The land which is being used for Housing development project and developed open plots for the purpose of selling it to the prospective customers, the unsold plots and further purchased during the year as on the date of balance sheet are valued at cost plus proportionate development cost and included in Inventory as Work in Progress. As per the applicable accounting standards and accepted practices, the inventory i.e. land allocated to Housing project is to be valued at cost or market price which ever is less as on the date of balance sheet. Accordingly the land perta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of closing stock. In this regard it is respectfully submitted that the valuation of purchase and sale of goods and inventory for purposes of determining the income chargeable under the head business or profession are governed by the provisions of section 145A of the IT Act. 13. The AR submitted that during the course of original assessment proceedings the assessee produced before the Assessing Officer the details of closing stock and work in progress and how the same is arrived and also the statement of details of closing stock were submitted. After considering all these statements the learned Assessing Officer accepted the correctness of the closing stock which is arrived in accordance with the method of accounting regularly employed by the assessee. Without considering the fact of part of the land is in the nature of fixed asset and also a part of land in the form of work in progress and also without verifying the records and submissions made to the Assessing Officer during the course of asst. proceedings, the learned Commissioner opined that the closing stock value is not reflected and shown correctly in the balance sheet. There is no allegation even by the Commissioner and sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver is lower, at the option of the trader. The principle underlying this is to provide a reserve for the loss which he is likely to incur during the period. By giving the option to adopt the lower of the two valuations the trader is protected from being taxed in respect of profits which he did not actually earn. Profits always represent the surplus of the receipts over the cost price including expenditure. The cost is always taken and understood to be the original cost. The rules of accountancy also construe the cost price as 'original cost price' and not a notional cost price and liberty should be given to the assessee to adopt either the original cost or market value. It is misconception to think that any profit "arises out of the valuation of the closing stock" and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close an accounting period is a necessary of the process of determining the trading results of that period, and can in no sense be regarded as the "source" of such profits. Nor can the place, where such valuation is made. regarded as the situs of their accrual. The source of the profits and gains of a bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) it is prejudicial to the interest of revenue. If one of this is absent - if the order of the ITO is erroneous but is not prejudicial to the interest of revenue or if it is not erroneous but is prejudicial to the interest of revenue - recourse cannot be had to section 263(1) of the Income-tax Act. There can be no doubt that the provisions cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. However, an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase "prejudicial to the interest of revenue" is not an expression of art and it is not defined in the Income-tax Act. It should be understood in ordinary meaning, it is of wide import and it is not confined to laws of tax. Applying the scope of section 263 to the facts of the present case, we find that while passing the order, the Assessing Officer has not applied correct provisions of the Act as stood during the relevant assessment year under consideration. From the record, we find that the Assessing Officer framed the assessment order u/s. 143(3) of the Act on 31.12.2008 wherein the assessee's claim u/s. 32(1)(iia) of the Act with r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be granted. Nonmaintenance of separate books of account for convention centre itself cannot be a reason for outrightly rejecting the claim u/s. 80IB of the Act. Particularly when books of account maintained by the assessee in the regular course of business had been accepted and no defect has been pointed out either by the CIT or by the Assessing Officer. If the assessee otherwise eligible for deduction u/s. 80IB, the same is to be granted in the light of the material produced by the assessee by the Assessing Officer. 20. In the present case it is an admitted fact that the assessee has produced the information for availing deduction u/s. 80IB(7B) in Form No. 10CCB duly certified by the chartered accountant and also there is no allegation that the assessee is not entitled for deduction under this section. Further, the assessee has been granted with this deduction in earlier assessment years which is not disturbed by any process of law and it is continued to be granted in subsequent assessment years. Even if separate books of account are not maintained, in that event also the deduction u/s. 80IB(7B) could be granted to the assessee in proportion to the turnover to profit of conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue reflected in the value of land in the valuation report and value mentioned in the books of account with reference to closing stock. We have heard the rival submissions and perused the material on record. It is the contention of the assessee that it does maintain correct stock account and the valuation report given to the bank is only on estimate basis and was inflated to match the amount of loan availed. The fact that the assessee maintained stock account and the stocks were recorded in the books of accounts maintained by the assessee is not disputed by the Department. In view absence of maintenance of day to day stock account of land and acceptance of the same by the Assessing Officer cannot be found fault by the CIT. It is further seen that the valuation report given to the bank is for availing the loan from bank. Another important aspect is that the Assessing Officer accepted the profit declared by the assessee on the basis of books of accounts. Before making addition on account of excess stock of land, the CIT has to bring material on record to establish the fact that the assessee was actually having physical stock as per the valuation given to the bank. Merely relying upon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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